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Saturday, June 21, 2014

To
make the process of constructing or reconfiguring a portfolio simpler, I think
of the portfolio in terms of its exposure to the 4 main investment categories:
Game changers, cash gushers, YOLOs (you only live once) and condoms. In this
article, I will be explaining these investment categories.

Game changers are generally top quality
companies with durable competitive advantages which allow them to achieve
superior returns on capital. However, unlike companies like McDonald’s or Apple
which have a wide economic moat and generates high returns on capital, game
changers still have a lot of opportunities to reinvest profits and grow their business.
In short, game changers are companies that have the potential to become the
next Starbucks or Berkshire Hathaway. It may be difficult to identify companies
in this category. And even if you do find such companies, they may be trading
at a rich valuation. However, investors should be patient in trying to build up
this category of their portfolio. An investor could potentially move up a notch
or two in life by buying a game changer at a reasonable price and holding it
for the long-term, hence the term game changer.

Cash gushers are investments that have
healthy income yields. The purpose of this category of investments is to
provide you with a stream of cash to reinvest and expand your portfolio. It’s
important that your cash gusher investments are able to maintain decent income
distributions during a crisis as that’s when you will need cash the most to
take advantage of bargains. Some examples of cash gushers are REITs, high dividend paying blue chip
stocks, rental properties and private businesses.

Condoms are positions that give your
portfolio some protection when shit goes down. I call these positions condoms
because whenever I think of risk management, I think of a couple who don’t want
to have kids and use a condom to prevent the risk of conception (because having
the dude to pull out before he cums is too risky). The main asset in the condom
investment category is of course cash. The investor can use his cash to buy up
assets during a market downturn when they’re cheap; this will of course improve
the investor’s odds of coming out ahead when the market recovers. If the
investor uses leverage, he can dip into his cash reserve to in the event that
the cash inflows of his portfolio drop below the cost of servicing his debt.
Another asset that falls in the condom category is gold. Gold is thought of by
a lot of people as a safe-haven asset and could help with maintaining some of your
portfolio’s real value if really fucked up things like hyperinflation occurs. Short
positions can also be considered as a position that falls into the condom
category. An investor’s short positions are likely to go up in a recession; she
can then liquidate her shorts and use the proceeds to go long on undervalued
assets. I personally never took a short position in my life and know next to
nothing about shorting. But it is something that I’m interested in learning
more about.

YOLOs are investments that you won’t normally
make but are attractive as they’re trading at stupidly low prices. Some examples
of YOLOs are mediocre stocks with deep discounts to intrinsic value,
undervalued distress debt, and commodities trading at below their cost of
production. Investments that fall into the YOLO category are not meant to be
held for the long-term and should be sold once they are no longer selling at
stupidly low prices. Investors should allocate only a small percentage of their
portfolio to YOLOs as this investment category can be riskier.

As
always, thank you for reading. I’m sorry if I haven’t analyzed any stocks
recently, I know that’s the main reason you guys read my blog. It’s just that
it’s very difficult to find attractive investment opportunities in this market
as most of the stuff are either overvalued or fairly valued. Please e-mail me
or drop a comment if you think there is an interesting stock that I should
analyze. Take care and stay rational.

Sunday, June 15, 2014

I
recently read an article by a Malaysian investor claiming that certain stocks
had no risks. Let me just clarify, I don’t
think that this guy is bullshit. In fact, I think he is a successful businessman
and that he means well. But I strongly disagree with his opinion on certain
plantation counters having no risk. To be fair to him, he later clarifies that by
saying there may be short-term market risk, but in the long-term investors will
certainly make exceptional profits. But how can he be so sure? After all, the
profits of palm oil plantation companies are highly dependent on the price of
crude palm oil. And there’s always the possibility that if CPO prices are high,
supply will increase and drag CPO prices down to levels that allow plantation
companies to only earn average returns on capital. When I say there’s no such
thing as risk-free investing, I meant both in the short-term and the long-term.
Anyway, the rest of this article will not
be related to what this investor said, instead I will further elaborate why I
think the idea of risk-free is a myth.

Side note: I personally have no idea
how the palm oil plantation sector will perform in the long-term (I hope it
does well, as a stock I own has some exposure to this sector).

If
you studied finance in university, you would have been taught that government
securities were risk-free assets. All you have to do is look back at the
European sovereign debt crisis to know that this isn’t the case. In fact, by
investing long-term in U.S. treasury bonds (which are thought of as one of the
safest assets in the world) at current yields, you will almost guarantee that
your investment will get fucked in real terms when all is said and done. The
ten year treasury has a yield of 2.60% and the long-term inflation rate is
around 3-4%. Good luck using the proceeds of the Treasury bond in the future to
buy as many cheeseburgers or mamak dinners as you could buy today.

Even
companies with large economic moats bought at low prices are not a sure thing.
Sure, it would take a real shit storm for a company like P&G or Nestle to
get its intrinsic value impaired. But such shit storms are still within the
realms of possibility. Before I invest in something, I have to be reasonably sure that it can deliver
above average returns. But I understand the risks, and I monitor the
performance of the company to see if any major risks materialize and act accordingly.
Once you think your investments are risk-free, you start becoming sloppy and
the probability of losses increase. Thank you for reading. Take care and stay
rational.

Sunday, June 8, 2014

In
this article, I will be doing a quick analysis of the quarterly performance of Kumpulan
Fima’s business segments. Before I begin, let me just disclose that I do own
shares in the company. I used to have a theory that an analyst would do a
better job if he had skin in the game as it would force him to really try to
understand the company. But after seeing how some people vehemently defend
overvalued shit companies that they got stuck with (I wish my future wife would
defend me the way these shmucks defend their investments), I’m starting to
rethink my theory. However, I think I have enough sociopathic traits to pull off
an objective analysis.

Manufacturing of security and confidential documents:
Profit before tax (PBT) from the manufacturing division experienced a
significant decline of 56.7% from the previous quarter. The decline was the
result of lower revenue and less favorable sales mix. However, I will cut the
company some slack as the manufacturing division did post strong results over
the past 12 months with revenue and PBT growth of 19+%. I will be monitoring
the results of the manufacturing division closely to see whether the dip was cyclical
or if it is more persistent in nature.

Plantation division: The plantation
division really stepped up its game in the quarter ended March 31, 2014. Revenue
and PBT grew by 91.8% and 60.7% respectively from the previous quarter.The strongerperformance was a result of both the higher selling price of CPO
and CPKO and higher sales volume. The fortunes of this division are tied to
palm oil prices, so it’s difficult to predict how this division will perform
over the long-term. All management can do is to keep striving to be even more
efficient and achieve a lower cost structure as that’s the key to getting a
competitive advantage in a commodity business.

Bulking division: When I first analyzed
Kumpulan Fima, I really liked its bulking division due to its solid profit
margins. Revenue and PBT increased by 7.8% and 15.7% respectively from the
previous quarter. However, the business environment for this division remains
challenging as revenue and PBT are down by 13.9% and 11.39% respectively from
the corresponding quarter a year ago. Hopefully the performance of the bulking
division can continue to pick up.

Food
division: This division sucked this quarter and has been sucking for the
past 12 months. As this division generates most of its revenue in Papua New
Guinea, it has been brutalized by the weakening of the Kina (Papua New Guinea’s
currency). A weakening Kina would by itself cause the division’s revenue and
PBT to decline in Ringgit terms. However, the situation is made worse as a
significant amount of the division’s raw materials are denominated in USD. The
weakening Kina makes these raw materials more expensive and causes the division’s
cost structure to increase. I don’t want to write this division off yet because
it did report decent profits a year ago. If I was in charge of Kumpulan Fima, I
would give this division 3 years to turn itself around. If it can’t at least
earn its cost of capital by then, then I would seriously consider selling it
off. As Kenny Rogers once sang : “You've got to know when to hold 'em, Know
when to fold 'em, Know when to walk away, Know when to run”. One of the best
fucking pieces of advice given for business and investing, ever. Thank
you for reading! Take care and stay rational.